Medical practice finance: how to fund the purchase, fit-out or expansion of a practice

Buying into a medical practice, setting up new premises or expanding an existing clinic involves a different type of assessment from most other small business lending. A lender is generally looking at the practitioner, the practice's income and financial performance, the premises and sometimes the specific equipment being funded, all at the same time.

Whether you are purchasing a practice outright, buying into a partnership, fitting out new premises or funding growth, understanding how lenders approach medical finance can help you plan the transaction and avoid unnecessary delays.

It can also help you work out how the different parts of the project should be funded. A practice acquisition, commercial property purchase, fit-out and piece of medical equipment do not necessarily need to sit within the same loan or have the same loan term.

What is medical practice finance?

Medical practice finance covers a range of lending used by doctors, dentists (https://www.3lane.com.au/industries/dental-specialist-clinics), allied health professionals and other practitioners to fund their business. Depending on the transaction, this can include:

• Purchasing an existing practice or buying into a partnership
• Acquiring the commercial property the practice operates from
• Fitting out new or leased premises
• Purchasing medical, dental or diagnostic equipment
• Funding working capital during a transition or growth period
• Refinancing existing practice or equipment debt
• Funding expansion to a second location or additional practitioners

The borrowing entity is often the practitioner personally, a company or a trust, and the right structure depends on how the practice is owned and operated.

Because a medical practice can involve several different assets and funding needs, the finance structure can be just as important as the total amount borrowed.

Why lenders treat medical finance differently

A number of Australian lenders have specialist healthcare lending policies and teams covering medical, dental, veterinary and selected allied health professions. Depending on the profession, borrower and transaction, this can provide access to lending policies designed specifically for healthcare businesses rather than standard small business lending criteria.

The treatment is not the same across every healthcare profession or lender. A policy available to a GP, medical specialist or dentist may differ from one available to a physiotherapist, psychologist or other allied health practitioner.

Lenders will still look closely at the specific practice, its billing base and the practitioner's own financial position when assessing the application.

What do lenders assess?

Lenders commonly look at several connected areas of a medical practice finance application.

1. The practitioner

This can include registration and qualifications, years in practice, specialty, existing debts, personal financial position and the track record of any guarantors. A well-established practitioner in an in-demand specialty may be viewed differently from someone early in their career.

For someone establishing their first practice, the lender may also look at their employment history, existing patient or referral relationships and experience working in the area where the new practice will operate.

The fact that the business itself is new therefore doesn't necessarily mean the practitioner has no track record. A doctor or dentist may have years of professional experience before opening their own practice.

2. The practice's income and billing base

Lenders typically want to understand billing history, patient or client volume, payer mix (including Medicare, private health funds or self-pay), referral sources and how income has trended over recent periods.

For an existing practice acquisition, historical financial statements and current trading results can help the lender assess whether the earnings being purchased are sustainable.

A practice reliant on a small number of referring practitioners may be assessed more conservatively than one with a broad, diversified referral base.

The lender may also look at whether revenue is closely tied to the outgoing owner. This can be particularly important when buying a practice where a significant proportion of patients or referrals have historically been associated with one practitioner.

3. The premises

Where premises are being purchased or fitted out, the lender may consider the location, condition, permitted use, lease terms if applicable and how suited the space is to the specific type of practice.

Purpose-built medical fit-outs can carry limited alternative use, which may factor into the lender's view of the fit-out or premises as security.

Where the premises are leased, the remaining lease term and renewal options can also matter. A lender funding a substantial fit-out will generally want to understand whether the practice has sufficient tenure in the property to justify the investment.

4. The equipment or transaction being funded

For equipment finance, the lender will generally consider the type, age, useful life and resale value of the equipment, alongside the practice's capacity to service the additional debt.

Specialised diagnostic or surgical equipment is typically assessed differently from general-purpose office or clinic fit-out items.

Equipment finance can also have a different term and security structure from a loan used to acquire the practice itself. For example, equipment finance may be secured by the asset being purchased.

That means a $100,000 piece of equipment with a defined useful life may be financed differently from goodwill acquired as part of a practice purchase.

What are you actually buying when you buy a medical practice?

A practice acquisition can involve much more than physical assets. Depending on the transaction, the purchase price may include equipment, furniture and other assets as well as goodwill associated with the established business.

That goodwill can reflect factors such as the practice's trading history, patient base, location and established operating systems.

For the lender, the key question is whether the practice can continue generating enough income after the ownership change to support the debt.

This makes due diligence particularly important. A buyer should understand not just the headline revenue of the practice but its expenses, practitioner arrangements, staffing costs, lease commitments and how dependent the business is on the outgoing owner.

How much can you borrow?

There is no fixed lending percentage across medical practice finance. What a lender will offer depends on factors including:

• Whether the transaction involves a practice purchase, property, fit-out, equipment or a combination
• The practitioner's specialty, experience and financial position
• The practice's billing history and financial performance
• Lease terms, where premises are leased rather than owned
• Loan purpose – acquisition, fit-out, equipment, expansion or refinance
• Other security available
• The lender's healthcare policy and eligibility requirements
• How much working capital the practice will have after the transaction

An established, well-billing practice with sustainable earnings may be assessed differently from a newly established or turnaround practice, even at a similar transaction size.

Importantly, the amount a lender is prepared to provide may also differ across different parts of the same project.

For example, a practitioner purchasing a practice, installing new equipment and completing a fit-out may use separate facilities because those costs have different useful lives and security characteristics.

How can a medical practice purchase be financed?

Practice acquisition finance can be used when purchasing an entire practice or buying a share in an existing practice or group.

For an established business, the lender may assess financial statements, tax information and current trading performance alongside the purchase price and terms of the transaction.

The lender will generally want to understand what the buyer is acquiring, how the purchase price has been determined and whether the practice's earnings can support the proposed debt after settlement.

Where the seller will remain involved for a transition period, that arrangement may also form part of the overall assessment because it can affect continuity for patients, staff and referral relationships.

How does medical fit-out finance work?

A new medical practice can require substantial upfront investment before the doors open. Consulting rooms, treatment areas, reception spaces, plumbing, electrical work, cabinetry and specialised installations can all add to the cost.

Medical fit-out finance can help spread some of those costs rather than requiring the practitioner to fund the entire project from cash reserves.

The lender may want to see:

• a signed lease or details of the premises
• fit-out plans and specifications
• builder or contractor quotes
• a detailed project budget
• expected completion dates
• any required approvals
• the practitioner's contribution to the project

Cost overruns also need to be considered. A budget that uses every available dollar for construction without leaving room for delays, variations or working capital can place pressure on the practice before it begins trading.

How can medical equipment be financed?

Medical equipment can often be financed separately from the practice purchase or fit-out.

The appropriate structure depends on the asset and lender, but equipment finance may allow the practice to acquire the equipment while preserving cash for other establishment or operating costs.

The loan term should also make sense relative to the useful life of the equipment. Financing equipment that may need to be replaced relatively quickly over an excessively long period can create problems later.

Equipment costs can extend beyond the purchase price itself, so installation, commissioning, software and other associated costs should also be considered when calculating the total funding requirement.

Costs to plan for beyond the purchase price

Depending on the transaction, practitioners may also need to budget for:

• Legal and accounting due-diligence costs
• Practice valuation fees
• Registration, accreditation or compliance costs
• Lease negotiation and fit-out costs
• Equipment delivery, installation and commissioning
• Working capital for the transition period
• A cash buffer to cover the settlement and handover period
• IT systems and practice software
• Insurance
• Staff recruitment and initial payroll costs
• Marketing and other establishment expenses for a new practice

Working capital is particularly important when opening a new practice because expenses can begin before revenue reaches normal levels. Rent, wages, insurance and other overheads still need to be paid while the patient base and billing levels build.

Buying into an existing practice versus starting fresh

Buying into an established practice generally provides an existing patient base, billing history and referral relationships, which can give the lender historical business performance to assess.

Setting up a new practice from scratch typically requires a lender to place more weight on the practitioner's own track record, business plan and realistic income projections, since there is no existing billing history to assess.

Both pathways can be financed, but the supporting information a lender will want tends to differ significantly between the two.

For an established practice, the focus may be on whether historical earnings will continue after the transaction. For a new practice, the focus shifts towards the practitioner's experience, expected patient numbers, projected billings, expenses and the amount of cash available to support the business while it establishes itself.

What documents might you need?

Requirements differ between lenders and transactions, but a medical practice finance application may require:

• personal financial information
• evidence of professional registration and qualifications
• financial statements and tax returns for an existing practice
• current management accounts or billing information
• the practice sale or partnership agreement
• a lease or property contract
• equipment quotes or invoices
• fit-out quotes and budgets
• a business plan and forecasts for a new practice
• details of existing debts and finance facilities

A practitioner buying into an established practice will therefore prepare a different application from someone opening a new clinic or simply replacing a piece of equipment.

What happens when you apply?

1. Assess the transaction, structure and objectives before approaching lenders.
2. Compare lender appetite for the specific specialty and transaction type.
3. Prepare financials, billing history and practice or equipment documentation.
4. Submit the application and respond to credit questions.
5. Arrange any required valuations and satisfy approval conditions.
6. Coordinate settlement, fit-out timing and loan documentation.

Where several facilities are involved, timing becomes particularly important. The practice acquisition, lease, fit-out and equipment delivery may all have different deadlines, so the finance needs to be coordinated around the wider transaction rather than treated as a standalone loan application.

Why lender choice matters in medical finance

Not all lenders assess medical and allied health professionals in the same way, and appetite can vary by specialty, practice structure and transaction type.

Some lenders have dedicated medical finance policies for eligible healthcare professions, while others apply standard commercial lending criteria.

Even among lenders with specialist healthcare policies, eligible professions, lending limits, security requirements and assessment criteria can differ.

An experienced finance broker who works regularly with medical professionals can help match the transaction to a lender whose current policy and appetite fit the circumstances.

Explore medical and healthcare finance

3LANE Finance can assess the transaction, compare lenders experienced in medical and healthcare finance and help structure the application around your circumstances.

Contact 3LANE Finance

Important information: This article provides general information only and does not constitute financial, legal, tax or accounting advice. Lending criteria, pricing and availability vary between lenders and are subject to assessment and approval.